Margaret Coker

MOSCOW (CBS.MW) -- Russia announced Monday it's selling a 5.87 percent stake in Gazprom, the world's largest natural gas company, to raise as much as $1.4 billion and help narrow the government's budget gap.

Shares of Gazprom sank on the news, although analysts said the revenue-raising plan could be good for the company, especially if it helped consolidate its relationship with Royal Dutch Shell (RD)
rd
and Italy's Eni spa.

"The stake will find a buyer, most probably among strategic partners of Gazprom," said James Henderson, the oil and gas analyst at Moscow's MFK Renaissance investment bank.

Gazprom's American Depositary Receipts traded in London fell 9.5 percent to a 52-week low of $9.68. Each ADR represents 10 ordinary shares, and it is the only trading vehicle foreigners are allowed to buy directly. Gazprom's ordinary shares traded on the Russian Trading System index dropped 4.8 percent to 38 cents per share.

Gazprom, supplier of 25 percent of Western Europe's gas, is key to helping solve Russia's revenue problems. To boost tax receipts and ease its debt burden, Russia cracked down on tax delinquents such as Gazprom, which has now agreed to pay $643 million in monthly taxes.

The share sale, rumored for some time, was announced officially by President Boris Yeltsin. He ordered the government to reduce its stake in the company to 35 percent from 40.87 percent. The government is the largest single shareholder in the company, Russia's largest by assets and market capitalization. Employees own 13 percent, and the company owns 12 percent. Gazprom declined to specify the remaining ownership.

The terms of the sale are still unclear. A Gazprom spokesman said the company would lobby for a direct sale of its shares to its partners, Eni and Shell, over a public auction.

"Gazprom has already said it would be unwise to sell almost 6 percent all at once," said company spokesman Gennady Yezhoz. "It's twice as much as foreign investors currently own. The price would go sharply down."

The 5.87 percent stake is valued at $1.4 billion, based on the price of the London ADRs. While the government likely will aim for that valuation, investors may try to push the price closer to the value of domestic shares, which would put the stake at about $550 million.

Shell declined to comment on the possibility of buying part or all of the shares. Eni spokeswoman Michele Favorite said her company has been in talks with Gazprom since February about the possible purchase of a stake.

Analysts expressed confidence that the shares would find a buyer at an attractive price, unlike Russia's last attempt at privatization. Even after the government slashed the starting price of the Rosneft oil company, investors shied away from the deal because of the depressed world oil situation.

Gazprom produced 533.8 billion cubic meters of natural gas last year, a drop of 6.2 percent from 1996 figures. Its gas exports fell 5.4 percent to 116.8 billion cubic meters from 123.5 billion cubic meters in 1996, due to a warm winter in Europe, the company said.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.